Risks, revenues and investment in electricity generation: Why policy needs to look beyond costs
Energy policy goals frequently depend upon investment in particular technologies, or categories of technology. Whilst the British government has often espoused the virtues of technological neutrality, UK policies now seek to promote nuclear power, coal with CO2 capture and storage, and renewable energy. Policy decisions are often informed by estimates of cost per unit of output (for example, Â£/MWh), also known as levelised costs. Estimates of these costs for different technologies are often used to provide a 'ballpark' guide to the levels of financial support needed (if any) to encourage uptake, or direct investment away from the technologies the market might otherwise have chosen. Levelised cost estimates can also help to indicate the cost of meeting public policy objectives, and whether there is a rationale for intervention (for example, based on net welfare gains). In the UK electricity sector, investment is undertaken by private companies, not governments. Investment is driven by expected returns, in the light of a range of risks related to both costs and revenues. Revenue risks are not captured in estimates of cost or cost-related risks. An important category of revenue risk is associated with electricity price fluctuations. Exposure to price risks differs by technology. Low electricity prices represent a revenue risk to technologies that cannot influence electricity prices. By contrast, 'price makers' that set marginal prices are, to an extent, able to pass fuel price increases through to consumers. They have an inherent 'hedge' against fuel and electricity price fluctuations. Based on recent research by the UK Energy Research Centre, this paper considers the implications of such price risks for policy design. The authors contrast the range of levelised costs estimated for different generating options with the spread of returns each is exposed to when electricity price fluctuations are factored in. Drawing on recent policy experiences in the renewable energy arena, in the UK and elsewhere, the authors provide an assessment of investment risk in policy effectiveness and consider how policy design can increase or ameliorate price risk. They discuss the circumstances under which policy goals might be best served by 'socialising' price risk, through fixed price policies. The importance of increased and explicit attention to revenue risk in policymaking is discussed, along with the means by which this might be achieved.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Foxon, T. J. & Gross, R. & Chase, A. & Howes, J. & Arnall, A. & Anderson, D., 2005. "UK innovation systems for new and renewable energy technologies: drivers, barriers and systems failures," Energy Policy, Elsevier, vol. 33(16), pages 2123-2137, November.
- Blyth, William & Bradley, Richard & Bunn, Derek & Clarke, Charlie & Wilson, Tom & Yang, Ming, 2007. "Investment risks under uncertain climate change policy," Energy Policy, Elsevier, vol. 35(11), pages 5766-5773, November.
- Green, Richard & Newbery, David M G, 1991.
"Competition in the British Electricity Spot Market,"
CEPR Discussion Papers
557, C.E.P.R. Discussion Papers.
- Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October.
- Feretic, Danilo & Tomsic, Zeljko, 2005. "Probabilistic analysis of electrical energy costs comparing: production costs for gas, coal and nuclear power plants," Energy Policy, Elsevier, vol. 33(1), pages 5-13, January.
- Roques, F.A. & Nuttall, W.J. & Newbery, D.M. & de Neufville, R., 2005.
"Nuclear Power: a Hedge against Uncertain Gas and Carbon Prices?,"
Cambridge Working Papers in Economics
0555, Faculty of Economics, University of Cambridge.
- Fabien A. Roques & William J. Nuttall & David M. Newbery & Richard de Neufville & Stephen Connors, 2006. "Nuclear Power: A Hedge against Uncertain Gas and Carbon Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-24.
- Mitchell, C. & Bauknecht, D. & Connor, P.M., 2006. "Effectiveness through risk reduction: a comparison of the renewable obligation in England and Wales and the feed-in system in Germany," Energy Policy, Elsevier, vol. 34(3), pages 297-305, February.
- Awerbuch, Shimon, 2000. "Investing in photovoltaics: risk, accounting and the value of new technology," Energy Policy, Elsevier, vol. 28(14), pages 1023-1035, November.
- Wiser, Ryan & Bachrach, Devra & Bolinger, Mark & Golove, William, 2004. "Comparing the risk profiles of renewable and natural gas-fired electricity contracts," Renewable and Sustainable Energy Reviews, Elsevier, vol. 8(4), pages 335-363, August.
- Powell, Andrew, 1993. "Trading Forward in an Imperfect Market: The Case of Electricity in Britain," Economic Journal, Royal Economic Society, vol. 103(417), pages 444-53, March.
When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:32:y:2010:i:4:p:796-804. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.